On January 21, China reported that its GDP grew 6.6% in 2018. Although 6.6% sounds pretty strong, and most other countries would love to grow 6.6%, it was China’s lowest growth rate since 1990. Some experts are speculating that the slowdown is part of an overall worldwide slowdown, and China, as an exporting powerhouse, is bound to slow down if the rest of the world is slowing down. Other experts believe the causes of China’s slowdown are more fundamental and endemic to China itself. These other experts believe we are just now seeing the ramification of many years of China’s one-child policy and that aging demographics will doom China to slower growth forever, or at least until they reverse the one-child policy. I am a believer in causation due to big demographics, but that doesn’t matter. What matters is, as (probably) an American, should you care about China’s issues, and why?

As a Consumer

As a consumer, particularly one who shops at Wal-Mart and its ilk, China’s slowdown probably won’t matter to you. Just because China’s economy is slowing down doesn’t mean China won’t continue to be the manufacturer and/or producer of many of the goods you see at Wal-Mart. In fact, it could be just the opposite. China may be motivated to produce and export even more in order to re-boot its growth. Higher tariffs play a role in this: higher tariffs on goods exported from China means US consumers pay more for those goods, which likely means they won’t buy as many of them, which means the Chinese economy gets hurt, or at least doesn’t grow as much. Tariffs are part of the cause of China’s slowdown, not the result of China’s slowdown. Tariffs are temporary, in that they can be reversed either through a new trade agreement or a new administration that chooses not to enforce tariffs. My point is, as a consumer of goods manufactured in China, which it is hard not to be, you won’t see much of an effect caused by a slowdown in China, and effects you do see that result from tariffs are temporary.

As an Investor

The story is different as an investor. The stock market will suffer if it is perceived that China’s slowdown will continue and slow down even more. Many companies, particularly large-cap multinational corporations such as those that make up the S&P 500 and NASDAQ 100 Indexes, are highly dependent on China as a source of manufacturing and as a growing market for their goods. Corporate profits will suffer as the Chinese economy slows down. One way China has in the past dealt with economic slowdown is through currency devaluation. Stock market corrections during 3Q 2015 (S&P 500 down about 14%) and 1Q 2016 (S&P 500 down about 12%) were both due to an actual or threatened devaluation of the Chinese Yuan by the Chinese government. Devaluation could easily happen again, and if you are invested in the stock market in any capacity there is no way to avoid suffering as a result. China has made a concerted effort to bolster its own currency since 1Q 2016 but it may need to devalue again if lower growth threatens its economy.

IMO

Tariffs and trade negotiations get the headlines, but I believe the performance of the Chinese economy apart from tariffs is a larger issue of concern to investors. This is another reason why we are likely to see higher levels of volatility ahead. Consumers: You can just keep buying and you will probably have just as much if not more selection to choose from without major threat of inflation in the long run. The slowdown in the Chinese economy will be important to some people but not to everyone here in the US.

My file drawers are in a constant state of being overstuffed. I still get paper bank and credit card statements and after I reconcile the statements and pay the bills I stuff the paper into organized files. As time passes, these files get more and more full of old bills. How long should I keep stuff before I toss it?

Paper Chase

For this post, I am using another recent blog posted by Ross Menke at HumbleDollar.com titled “Paper Chase“. Menke says you should have 3 buckets: a “forever” bucket, a 3-to-7 year bucket, and a 1 year bucket. All of your papers should fall into one of these buckets. The 1 year bucket should be the largest. Said another way, there has to be a really good reason to hold on to bills, statements, etc., more than 1 year. Here is more detail on what Menke says:

Forever: Passport, birth certificate, medical records, estate documents such as trusts, wills, medical power of attorneys, insurance policies, real estate and mortgage documents (while you still own the property), and retirement plan contribution records. Menke also says to keep tax returns forever but not supporting records. I keep my tax returns in electronic form.

3 to 7 Years: The IRS says to keep documents that support your tax returns for 3 to 7 years. I keep a Taxes file for each year. According to Menke, I should toss everything after 7 years at the most. The IRS doesn’t conduct as many audits now, so unless you are pushing the envelope for a number of years, your chances of being audited are pretty small. However, that said, if you go by the IRS’s own 3 to 7 year guideline, you should be safe.

1 Year: Everything else! Throw it out! Bills, bank statements, credit card statements, brokerage statements, receipts. Most statements can now be retrieved, if needed, through electronic means, so you don’t need to save paper copies of them. When you get your new Homeowner’s insurance policy each year when you pay the bill, throw last year’s policy away. Same thing with your car insurance policy. Don’t let your files get clogged up with 2 and 3-year-old insurance policies that aren’t even in effect anymore. It is a good idea to save recent utility bills because they may be helpful to prove that you live in a certain place – to enroll your kids in school, for instance. However, throw the bills away after a year.

Why?

Why is it important to throw stuff away and keep your filing current? It’s just like losing weight: You will feel lighter, more nimble, and more able to deal with situations as they arise. As Marie Kondo says, if it doesn’t give you joy, then get rid of it. Throwing stuff away helps you gain and keep control of your life.

Shred It!

If it is possible, buy a shredder at your local Staples and shred stuff. Then you can put it in your Recycle bin and keep your privacy. Make sure you remove staples or paper clips before shredding, otherwise it’s bad for the shredder. Don’t have a shredder or have too much to shred? Your local city may have a shredding program. Contact them, or contact whoever collects your trash and recycling. If you don’t shred, then at least rip up or cut up your papers so as to make it difficult for bad guys to piece together your account numbers.

IMO

Getting rid of old papers that clutter up your files is an important part of financial planning because it keeps you focused on the future instead of the past. It’s January, and never too late to start a New Year’s Resolution, so I recommend you take some time and pull out the papers you don’t need, using the guide that Ross Menke (with help from the IRS) writes about and that I summarize here.

A front-page article in the January 14, 2019 edition of Investor’s Business Daily stated that public companies bought back about $1 Trillion of their own stock through public markets during 2018. The article didn’t speculate on a precise number of projected buyback volume during 2019 but stated that analysts expect companies to continue to buy back their own stock at a high level.

What

A stock buyback is when a publicly-traded company buys back its own stock through the public markets. Example: You decide to sell your shares of WTF Corporation, so you click Sell in your online trading platform. Typically, some other schmo buys your stock. With a stock buyback, WTF is actually the buyer. WTF puts its cash up just like any other schmo.

Why

Companies decide to buy back their own stock because they believe it is undervalued and they can make some money. They are just like any other investor in that way. In addition, by buying stock and taking the stock they bought out of circulation, or out of the “float”, they are hoping to boost the value of the remaining stock. Supply goes down, demand remains constant, so price theoretically goes up.

When

It is speculated (by the IBD article and by others) that the $1 Trillion volume of buybacks during 2018 was due in large part to the Tax Cuts and Jobs Act, specifically the repatriation of money that American companies were holding in foreign jurisdictions. The new tax law reduced taxes on cash repatriated back to the US. Companies did repatriate a ton of money, and they decided to use some of it to buy back their own stock. The combination of perceived valuation opportunity and abundance of cash caused the buybacks in large part. It is further speculated that the repatriation opportunity has run its course.

Did It Work?

Analysts believe that buybacks have been a primary driver as the stock market, specifically the S&P 500 Index, gained about 33% from November 2016 to October 2018. The approximately 18% correction we had during Q4 2018 was in part blamed on the concern that the repatriation opportunity was waning and that companies would no longer be buying back in such great numbers. So, yes, the buyback programs worked. However, there is another school of thought that says these companies should have spent their money on higher salaries for their employees or on additional research and development. Possibly, but there is a limit on how much R&D is actually accretive to a company’s earnings. If a company is already maxed out on its R&D and it still has money to spend (see: Apple), then it makes sense to buy back stock. It all comes down to which path does management calculate as being more accretive in the short and the long run to corporate earnings.

Play It?

Companies typically announce they will be buying back their own stock before they actually buy it back. If you pay enough attention, you can buy stock in companies that have announced buyback programs. If the companies themselves view their stock as undervalued, then it must be true, right? Will it make you money? That is to be seen. My take is that companies themselves are no better at predicting future prices than are any other investors.

IMO

Stock buybacks are one factor to consider, and they are a nice boost to existing shareholders, but they are not a deciding factor as to whether or not to buy stock in a company. Instead, look to corporate fundamentals – growth potential, gross margins, macro trends, quality of management – rather than stock buybacks as the reason to buy a company. After all, that’s what the companies themselves are looking at, perhaps with rose-colored glasses.

Reverse Mortgages developed a bad reputation when they started out 25 years ago, mostly because their fees and rates were high and they weren’t very flexible. However, over the past 10 years, a number of changes have occurred due to increased regulation and FHA control which have made reverse mortgages much more pro-borrower and user-friendly. If you are age 62 or older (the minimum age to qualify for a reverse mortgage), I highly recommend that you at least consider converting your existing standard mortgage into a reverse mortgage. If you are lucky enough to have paid off your mortgage, I recommend you think about getting a reverse mortgage, even if you don’t borrow anything on it.

HECM

A Reverse Mortgage is now known as a HECM, or a Home Equity Conversion Mortgage. Although you obtain a HECM through a private-sector lender, HECM’s are highly regulated through the FHA. Here are some general provisions for a HECM:

• You do not have to make monthly interest payments. Any unpaid interest is accrued to the loan balance.
• You can elect to draw on the loan in a lump sum, over a period of time such as every month, or not at all. It is your option. You can use it like a line of credit if you want.
• Any money you draw from your HECM is tax-free to you, because all you are doing is converting one asset you have (home equity) into another type of asset (cash).
• As long as you pay your property taxes and insurance, there is no event of default that will cause you to lose your home.
• The maximum loan amount is currently $726,525.
• It is a non-recourse loan. That means if the unpaid balance exceeds the value of your home, the lender cannot come after you or your heirs to make whole on the loan amount after you pass away or sell your house. Any unpaid balance is covered by the FHA’s insurance fund. This is one of the best attributes of a HECM.

Fees and Rates

Currently, the maximum fee for a HECM is $6,000, which may seem high, but is lower than it used to be. Interest rates are in the high 4%-range for either a fixed or an adjustable rate HECM.

Why I Like a HECM

If you own a home and have home equity built up, meaning you have lived in your home for a while, I like using a HECM as a type of insurance policy for things that may go wrong after you turn 62. HECM lenders advertise the HECM as a way of converting your home equity to cash, and that’s true, but not necessarily as a way to pay yourself income on a monthly basis, although that is one option. For instance, if you are in your 50’s and don’t already have loads of long-term care insurance, it is unlikely that you will be able to get the insurance you will need someday because insurers have clamped down on LTC insurance. Moreover, any insurance you obtain is unlikely to cover the costs of long-term care you will have to pay. Solution: Get a HECM, and if you need to pay for long-term care, either inside your home or at a facility, then draw down on your HECM. What if you draw down more than your house is worth? No problem, the lender cannot come back at your estate for the difference, and the FHA will pay any unpaid balance.

How Can I Get a HECM?

If you are age 62 or close to it and are interested in a HECM, go ahead and Google HECM Lenders In Your Area, and see what comes up. Not all HECM lenders are licensed to do business in every state or area, so you can do some digging. Alternatively, contact me and I can help you find a lender.

IMO

I view a reverse mortgage or a HECM as an important financial planning tool. Though you can us a HECM in its traditional sense of paying yourself some amount of monthly tax-free income, if you have sufficient home equity built up, I view its better use as a type of insurance line of credit that you can draw down on if and when you need it. Rather than deplete your cash savings when you need help, you can tap into your home’s equity, and otherwise keep to your plans with your other expenses. Questions? Google HECM, or contact me.

As you may have learned, Amazon’s Jeff Bezos and his wife MacKenzie are getting a divorce. It appears they did not have a Prenuptial Agreement. Because they live in Washington, which is a community property state, absent any other agreement, they will split their $140 Billion +/- fortune down the middle. Big money divorce! Big potential haul for the divorce lawyers. It is likely there will be an agreement at a number that is not 50/50.

Startup Marriage vs. Acquisition Marriage

Jeff and MacKenzie met before Jeff started Amazon. They were both in their 20’s when they got married. This is an example of a Startup marriage: Both parties are young with minimal difference in assets between them and no major asset to protect through a prenup. Thus, though it sounds like a gross miscalculation on Jeff’s part not to have had a prenup, it makes sense given where the couple was when they got married. There are no thoughts of a prenup when you are basically in the same place financially and there is nothing to protect.

It is a different story in an “Acquisition” marriage. This is typically where the parties are older and have accumulated significant assets prior to meeting and/or marrying the other party. Often, this could be not the first marriage for one or even both of the parties, and children from the prior marriages are involved. Though it can be a delicate subject to discuss when both parties believe they are on the road to bliss, it can be a smart and very important financial planning move to protect your assets through a prenuptial agreement.

First, Get a Financial Planner

If you are, say, 35 or older and have stars in your eyes for someone else, don’t fly without a net. Protect yourself first by working with a financial planner develop a plan for your assets prior to jumping into the marriage. Developing such a plan would be your brain ruling. Smart, rational thinking. Not the other. Do you have kids from a prior marriage, and you want them to get your assets when you pass and not your new spouse’s prior kids? Work with a financial planner, who will probably bring in an attorney, and get yourself a prenup and a will. While you are at it, make sure you have a Medical Power of Attorney agreement. Do you want your new spouse calling the shots on when to pull the plug, or do you want your prior kids making that horrible call? That all needs to be spelled out before you are unable to do so. Getting a Financial Planner is the important first step that will save a lot of pain later on.

IMO

Everyone thinks they are going to stay married forever, but everyone also is aware of the statistics, and so while a Prenup may be the Head getting in the way of the Heart, it is very important to get all of your ducks in a row before get married and mix too many metaphors. I will be glad to discuss any of this with any of you, so contact me if you see the need.

I read this article in the Investor’s Business Daily from December 27 about the current situation with Waymo, which is Google’s automated car division, and it made me think about where we are with automated cars vs. where we are with automated stock trading. There are parallels.

Cars

Many of you may not have yet seen an automated car on the road. They are being tested only in a certain few cities. Tested is the key word. When you see one, you know it is an automated car. Their appearance is unique. They don’t just go around driverless – they are not that advanced yet. There is a driver ready to take control as necessary. The gist of the IBD article I cite is that the cars still require drivers and that we are still several years away from being able to be fully autonomous. When you are talking about cars speeding down the road, lives are at stake, and so the whole business of automated driving is highly regulated, probably correctly so. You wouldn’t want to go out and drive among a road full of untested, unproven autonomous vehicles not knowing consistently which way they are going to turn next, would you?

Trading

Well, in a way, that’s what we are doing now in the stock market. We are trading in a market world where it is estimated that over 80% of trades are automated. Any of us who make trades are trading against these trading robots. By robots, I mean full autonomous – no driver behind the wheel when it is making trades. Yes, there is a “mechanic” who put together the robot, and the trading robot can go back to the shop if it is leaking oil, but the robot trades on its own without human intervention. In this sense, automated trading is ahead of automated driving. Because only money is at stake, not lives, there is little regulation. Nor should there be.
Automated trading is one of the primary reasons why we have increased volatility in the recent past. Unfortunately, if you are waiting for roads with less traffic, automated trading, algorithmic trading, is here to stay, and will only increase, in my opinion.

What To Do?

Here’s the good news, for non-robot human traders: There are ways you can still make money in the stock market. As with driving, you have to know the rules of the road. With most automated trading, and most of the volume related to automated trading, the objective is to capture fractions of a penny in profit. Trade millions of dollars at a time, but make only small fractions because these fractions are “sure things” for these types of traders. If you, Mr. or Mrs. Human Person, wants to make a trade, don’t do so to try to skim pennies. Don’t trade in the same league as the robots. Instead, have as your objective a fundamental or technical understanding of what you are buying and intend to hold it for a longer period of time. That way, your “slippage”, or the the fraction that you might pay that is higher than the listed price, won’t matter as much. You are looking for profits larger than $0.0001 or something like that, so your entry price isn’t that important. It might irritate you that some robot out there might get a slightly better price than you on a trade, but then again it might irritate you when some automated car cuts you off on the road. What do you do in both cases? Be upset for a fraction of a second, but then carry on to your destination.

IMO

The stock trading world has new rules of the road due to automated traders. You can still be successful with your investing if you understand how the new roads work. Keep your cool, and don’t be distracted.

Financial advisers often counsel clients to have a mix of Growth and Value stocks in their portfolios. It makes sense – Growth stocks do well during bull markets and Value stocks outperform during sketchy markets. Morningstar famously characterizes the mutual funds that it analyzes as either Growth, Value, or a blend of both.

Different Shopping Styles

If you think about it, the Growth investor and the Value investor employ very different strategies and methodologies. If they were shopping in a department store, the Value investor would head straight to the Sale rack and see what bargains they can find from the racks of clothes there, or they would read through the store flyers or coupons and buy what is on sale. The Growth investor, on the other hand, sees what is trendy or “in” and buys that item. Price is a concern for the Growth shopper/investor but not as big a concern as is being on the cutting edge. The Growth shopper reads the fashion mags and wants to look like the photos. The Value shopper could care less about what the models are wearing; they just want to look decent and not pay full price. Both are valid ways to shop and dress.

Two Different Skills

If you are a Sale-Rack shopper, to carry the analogy further, or you know or are married to someone who is, then you know that there is a certain mentality that goes with being a good Sale-Rack shopper. They wouldn’t be caught dead buying the latest in fashion because it is not worth it to them to do so. Conversely, the trend-setter shopper would be loathe to stoop to shopping in the sale rack. No chance of getting Instagram followers by wearing last year’s fashions.

Same Way in Investing

It is the same way in investing. Investors who are successful at finding good values are probably not the best at finding cutting-edge stocks that will lead the bull market upward. So, if you feel like you are good at finding bargain stocks, you probably should let someone else do the picking when it comes to Growth stocks. That means letting a Growth Fund do the picking for you. Go to Morningstar and find a Growth Fund that you like and buy that fund. Likewise, if you are good at spotting trends and know how to monetize your skill, then you probably aren’t as skilled at finding bargains, so you should use a Value Fund to do your Value investing. Always remember that it is good to have a mixture of Growth and Value in your portfolio in order to capture the upside (Growth) and to find undervalued deals out there (Value).

Need Help? Ask Me

If you don’t know whether you are good at either Value or Growth investing, or if you don’t know if you are particularly good at any type of investing, then you should get help with your portfolio construction before doing anything. Contact a CERTIFIED FINANCIAL PLANNER™, such as me, or through the cfp.net website. When it comes to your own money, it is very important to get it right, and the money you spend to work with a CFP® you could earn back fairly quickly if they help you get it right.

I don’t own GE directly but I have been fascinated watching GE’s downfall. My mother worked at GE back in the day and I grew up near Schenectady, so I have some connection to GE. GE’s recent history and troubles were well-reported in this article in the Wall Street Journal on December 14, 2018.

Time To Buy?

As I write this on 1/2/19, GE is trading at $8.10, up from a low of $6.66 in late December. That means some bottom-fishers are buying GE. But is it really a great buying opportunity? It is certainly an example of “catching a falling knife”, which is not a recommended strategy.

If you buy GE now, you do so because you believe in the new CEO, Larry Culp, and his ability to be a turnaround wizard. Because Culp turned around Danaher, he can turn around GE. However, GE is a much different animal than was Danaher – much larger, more bureaucratic, more internal vested interests. Moreover, it appears that GE’s power division, in particular, has issues that will take a long time to resolve, even with Culp in control. Also, you think at $8.10 there is little downside? What if it goes to $4? That’s a 50% drop. There is still plenty of downside, even at $8.10. So, as you might surmise, I don’t see GE as a great buying opportunity, even at $8.10, because there are so many huge obstacles to overcome even if they do have the right skipper at the helm.

Ackowledgement

On the other hand, it appears that GE’s management is at least in the Acknowledgement phase – they know they have a big problem and they are seeking to fix it. That’s not always true with companies that need fixing – some companies deny there is a hole in the boat even as the boat is sinking. GE over the years has hired some of the best and brightest people. That doesn’t mean they all know what they should do now but it does mean they are able to spot a problem when there is one. If GE as a whole is on board with fixing their own problem, that bodes well for the future of the company. Culp may or may not be the right guy to right the ship but, as an outsider not having grown up within GE, he is the right type of leader for its current situation.

IMO

So, if you do want to jump in, feel free, but don’t go all-in just yet. I think the argument to wait and see is stronger than the argument to buy GE now, but there are good reasons to buy now, especially if it is your “fun” money. I am skeptical that Culp will be the savior because of all of the entrenched interests at GE, but if those interests truly want to change then, with their help, Culp can work. Culp can’t do it on his own – he needs total cooperation from within. A difficult but not impossible task.

Happy 2019, everyone! I hope 2019 brings you hope, happiness and peace. The New Year is a time for resolutions, so let’s jump on that bandwagon. Losing weight is always a good one, perhaps a cliche but in reality good for your health. However, I am recommending 3 resolutions that relate to your personal finances. Check these out:

Don’t Look At Your Account Balance Every Day

It is highly likely that the increased market volatility that we have seen through 2018 will continue in 2019. The sources of the volatility are still in place:

• The Federal Reserve’s Quantitative Tightening policies of raising interest rates and culling its $4 Trillion + bond portfolio.
• Program stock trading that takes any trend and magnifies it to the n’th degree, likely thereby creating an over-impression of the strength of any directional move.
• An upending in the world trade order and the threat of higher tariffs and therefore higher prices on imported goods.
• President Trump’s leadership style. Like him or not, his style does not present a sense of calm.

When there is higher volatility in the markets, it is easy to get caught up in it and worry about your own account. Don’t! Instead, rise above the morass and take control of your own emotions. Remain calm yourself and act rationally with minimal emotion brought on by daily gyrations. One way to do that is not to look at your account balance on a daily basis. Studies show that it is best to look at your account balance on a weekly or even less frequent basis, specifically because one tends to be more rational when you look at it less frequently. If you are truly addicted and can’t help yourself, at least discipline yourself only to make decisions on your account on only one day per week, such as every Tuesday. There is a reason why your broker sends you an Account Statement only every month: It is because it is healthier to look at your account every month rather than every day.

Turn Off TV News

By this I mean national 24 hour news stations as well as the likes of CNBC, Bloomberg TV and Fox Business News. Live in a state of blissful ignorance. Instead of TV, find a trusted newspaper (old school) or website (21st Century) and read about what is happening. You may get the same news reporting, but the volume and hysteria are toned down if you read about it rather than watch it on TV. The Millennial Generation is criticized because they “cut the cord” and watch only streaming shows on Netflix and the like and eschew news about the world around them. Criticize them if you want, but there is a lot to be said for choosing not to get upset by the news of the day.

Read Fiction

Develop your financial plan, own the assets you want to own, and let things play out. Take a look at it every week, 2 weeks, or month; make adjustments as necessary; and otherwise live your life. Concentrate your efforts on your family, your job, and your community rather than on your personal finances. Read fiction rather than watch TV. Fiction is a wonderful escape from the vagaries of everyday life. Books cost too much? Go to your Public Library. If your Local doesn’t have the book you want, chances are your Local is part of a regional system and can get the book you want quickly. You like to read on your tablet instead of a heavy book? The Library loans out books to download. You may have to wait for it (I don’t understand why, but that is the case), but you can download books to your tablet for free through your local Public Library. Don’t know what to read? There’s always the Classics, but if you want a more modern book, first go to Amazon and read the best-seller lists and the reviews of the best-sellers to see what you might like, and then go to the Library and get it. If your book is not in stock, then put a hold on it and you will get it when it is your turn. Spending your time by reading fiction instead of fretting about the financial markets is good for your mental health and is also probably good for the performance of your portfolio.